Incidents:

The company released its 2023 annual report. Revenue for 2023 was 89.340 billion yuan, up 7.42% year on year; net profit to mother was 14.108 billion yuan, up 9.89% year on year; net profit after deducting non-return to mother was 13.666 billion yuan, up 10.83% year on year. Revenue for the first quarter of 2024 was 17.817 billion yuan, up 9.98% year on year; net profit to mother was 1.916 billion yuan, up 5.78% year on year; net profit after deducting non-return to mother was 1,760 billion yuan, up 13.27% year on year.

The company's revenue and profit improved quarter by quarter, and the performance continued to improve:

The company operates steadily, and its performance is growing quarter by quarter. According to annual report data, the company's revenue for the fourth quarter was 28.065 billion yuan, up 19.71% year on year, up 18.40% month on month; net profit from the fourth quarter to mother was 5.256 billion yuan, up 31.51% year on year, up 49.62% month on month. The year-on-year growth rate of the company's Q1-Q4 revenue in 2023 was -1.94%/3.06%/5.52%/19.71%, respectively, and net profit growth rates to mother were -20.69%/1.49%/14%/31.51%, respectively. The performance growth rate increased quarterly. On the profit side, gross margin continued to rise. The gross margin in 2023 was 44.44%, up 2.15 pcts year on year, 2024Q1 gross margin was 45.76%, up 0.59 pcts year on year, up 2.22 pcts month on month, and continued to pick up and improve. On the cost side, R&D investment continued. R&D expenses increased 16.08% year-on-year, and the R&D cost rate increased 0.95pct to 12.75%. At the same time, the total number of R&D personnel in the company remained stable, +1.89% over the same period last year. We believe that the company's profitability continues to recover, reflecting operational resilience, and performance is expected to continue to grow steadily as the macroeconomic economy recovers.

EBG drives the development of the main business, and the overseas and innovative business continues to grow:

(1) In the main business sector, the main domestic business had annual revenue of 46.81 billion yuan, of which EBG revenue was 17.845 billion yuan, up 8.12% year on year; PBG revenue was 15.354 billion yuan, down 4.84% year on year; and SMBG revenue was 12.679 billion yuan, up 1.46% year on year. EBG drove the growth of the company's main business in China, accounting for 38.12% of revenue. SMBG's revenue growth rate has been positive since 23Q3. We believe that, driven by the digital transformation and upgrading needs of enterprises, EBG continues to grow in industry segments such as industrial and commercial enterprises, energy and metallurgy, education and financial services, and its performance is expected to continue to rise; SMBG's performance is stable and is expected to gradually improve as macroeconomic recovery. Overseas main business revenue was 23.977 billion yuan, an increase of 8.83% over the previous year. Expansion is accelerating in emerging market countries, and growth reflects an optimistic trend of resilience. (2) Innovative business contributed new impetus to performance growth. Total revenue in 2023 was 18.553 billion yuan, accounting for 20.77% of overall revenue, up 2.65 pcts from 18.12% revenue in '22.

Among them, the robotics, smart home, thermal imaging, automotive electronics and storage businesses accounted for 5.53%/5.25%/3.68%/3.03%/2.16% of revenue respectively, up 26.16%/14.93%/17.73%/42.06%/19.50% year over year, all showing significant increases.

Intelligent IoT drives the digitization of scenarios, and AI technology helps long-term development:

According to the company's annual report, from a long-term perspective, the company continues to develop AIoT strategies, including security business and digital scenario business, and is becoming an OT (Operational Technology) manufacturer, providing digital products and solutions in many scenarios for the digital transformation of various enterprises. AI technology can be applied to various sensing products, combined with big data technology, used in system solutions, etc. The company launched the Guanlan Big Model, which is divided into a three-level architecture: basic big model, industry model, and task model. The basic large model has a large number of parameters, high generalization, and excellent performance. The large industry model can be further pre-trained and fine-tuned using industry data. It has expert level capabilities in targeted industry fields. The task model focuses on specific scenarios or businesses, and is an important way to implement the capabilities of the big model. We believe that large models can meet fragmented and diversified application needs, enhance the ability to understand the industry of solutions, upgrade software and hardware products and produce synergistic effects, help the company's IoT perception development needs in the long term, and further consolidate the leading position in the intelligent IoT industry.

Investment advice:

We expect the company's revenue from 2024 to 2026 to be 99.8 billion yuan, 114,047 billion yuan, 128.303 billion yuan, and net profit to mother of 16.402 billion yuan, 18.65 billion yuan, and 22.014 billion yuan respectively, and EPS of 1.76 yuan, 2 yuan and 2.36 yuan respectively, corresponding to PE 18 times, 16 times and 14 times, respectively. We believe that due to macroeconomic and other factors, industry valuations have a lot of room for repair. As an industry leader, the company is expected to be the first to benefit from a recovery in prosperity. We give 25 times PE in 24 years, and an EPS of 1.76 yuan, which corresponds to a 6-month target price of 44 yuan, maintaining a “buy-A” investment rating.

Risk warning: Geopolitical environmental risks; demand recovery falls short of expectations; technology research and development falls short of expectations.